Dow Theory Forecasts

The skies have been friendly for investors in Alaska Air Group (ALK). The shares have rallied 13% so far this year, building on last year’s 12% return.

The company topped the profit consensus by 11% in the December quarter, capping off a string of 14 straight profit surprises.

In the wake of Alaska’s price gains, the shares trade at 12 times the 2017 profit target, cheap relative to the broad market but 11% above the industry median.

However, the valuation doesn’t scare us. The stock’s PEG (price/earnings-to-growth) ratio of 1.0 is in line with the industry because analysts expect Alaska to manage superior long-term profit growth.

Last year, Alaska boosted its capacity 10% but grew traffic 11%, leading to a rise in the load factor, a key efficiency metric for airlines. These numbers include results for recently purchased Virgin America as if it had been part of the company all year.

Alaska, which raised its quarterly dividend 9% this year and now yields 1.2%, targets a payout ratio of 10% to 20% of earnings. Alaska Air is a Buy and a Long-Term Buy.